Reflections

5 Unexpected Threats to Your Retirement Plan

By Sean Condon, CFP®

Know the unexpected ways you could run into retirement trouble

Regardless of how old you are, the number one fear you probably have about retirement is running out of money1. But when it comes to worrying about your retirement nest egg, many of our thoughts turn to factors outside of our control, like a personal tragedy, market decline, or a natural disaster. While these events have the potential to wipe out your retirement savings, the real dangers to your retirement plan are the little-known and often ignored threats that could cause you to lose what you have diligently worked for. Here are some unexpected ways you could run into retirement trouble.

1. Not Estimating Your Retirement Needs

If you’ve managed to amass a significant nest egg, you may be proud of yourself. But even if you have half a million or a million dollars saved, it may not be enough. If you plan to retire in your early or mid-60s, your retirement savings will need to carry you through 30 years or more. Not to mention, you will encounter additional expenses along the way, such as healthcare costs, home maintenance, and taxes.

The best way to avoid financial anxiety in retirement is to work with your financial professional to map out various retirement scenarios to see what your savings can handle. Knowledge will empower you, especially in this situation. Almost half of those polled in the annual Transamerica Retirement Survey admitted that they have only guessed at how much they will need for a comfortable retirement2. Once you have an idea of what you’ll need for your unique situation, set up contingency funds to cover the unexpected and find ways to maximize your savings to give yourself a cushion.

2. Neglecting to Create A Withdrawal Strategy 

Just because you’ve worked hard to save for retirement and built up a nest egg doesn’t mean you can rest easy.  Once you start tapping into your savings, you need to develop a strategy to withdraw your funds so they last the rest of your life, however long that may be. 

Since you know that stocks have historically earned an average of 8% a year, you might assume that you can afford to withdraw 8% of the initial portfolio value (plus a little more for inflation each year)3. But in reality, to protect against the uncertainty of the market, you may have to limit your withdrawals to 4% or less4. Since there is no simple, one-size-fits-all plan, you need to figure out what will work for you and your unique situation, taking various factors into account, such as time horizon, risk tolerance, asset allocation, and unexpected living expenses.

3. Putting All Your Eggs in One Basket

Diversification is one of the most talked about investment strategies for a reason: it protects your investments from market volatility.  While you can’t eliminate risk from your portfolio entirely, you can cushion the blow if things go south.  If you put too much of your money into one stock or even one sector of the economy, you put yourself in danger of losing your retirement savings. 

Work with a professional to evaluate your portfolio’s current allocation to determine if it needs to be rebalanced or diversified.  Look at the big picture of all your accounts, including employer-sponsored ones, and ensure you are diversified across the board.

4. Forgetting to Plan for or Take Required Minimum Distributions

If you are 72, you must begin taking required minimum distributions (RMDs) from your traditional IRA and employer-sponsored retirement accounts.  It doesn’t matter if you need the money when you reach this age, you must still adhere to the RMD rules.  What happens if you don’t follow through?  The IRS will charge you an excess accumulation penalty of 50%. That can significantly harm your retirement savings amount. 

Perhaps more realistic that missing your RMD is to simply not plan for it.  After all, a large RMD is considered taxable income, and large bumps in your tax rates in retirement can have an adverse effect on your planning.  A Roth Conversion strategy can help lifelong savers minimize the eventual effects of their RMDs by systematically removing assets from an IRA in early retirement years, thereby lowering RMD requirements.  

5. Premature Loss of a Spouse

Losing your spouse is devastating, regardless of when it happens.  But losing a spouse during the final years of their career can be dangerous for the surviving spouse’s financial plan. Furthermore, retirement and long-term care costs may increase without a spouse to share costs and provide care.  Depending on pension benefits selected, a spouse’s pension may not pay out to the surviving spouse in the event of his or her death.  Also, if a spouse dies prior to eligibility for Social Security benefits, it may decrease the spousal Social Security benefits the surviving spouse receives.  

It’s critical for both spouses to be actively involved in the planning process to avoid a setback if this tragedy occurs.  Take the time to consider benefits for the surviving spouse, such as life insurance.  Wills, trusts, and beneficiary designations should be reviewed to ensure both spouses are protected financially.  You should also create a pension and Social Security strategy to optimize the benefit for the surviving spouse.  Examine multiple scenarios and make sure that you are taken care of no matter what happens. 

Create an Action Plan

Retirement planning can be complicated and stressful due to the many unpredictable factors that go along with it.  However, by understanding some of the risks and common roadblocks you may experience, you can plan ahead for the unexpected and reduce the chances that your retirement plan will fail. 

At Windgate Wealth Management, our goal is to guide you to financial success and help you navigate the challenges of life.  With our comprehensive planning process, we can help you prepare for life’s expected and unexpected circumstances. If you think your retirement plan needs a second look, book a complimentary consultation online or reach us at (844) 377-4963 or windgate@windgatewealth.com. 

1https://transamericacenter.org/docs/default-source/retirement-survey-of-workers/tcrs2019_sr_what_is_retirement_by_generation.pdf

2https://transamericacenter.org/docs/default-source/retirement-survey-of-workers/tcrs2019_sr_what_is_retirement_by_generation.pdf

3http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm

4http://www.nytimes.com/2015/05/09/your-money/some-new-math-for-the-4-percent-retirement-rule.html?_r=0.

 

Perritt Capital Management, Inc. is the Registered Investment Advisor for Windgate Wealth Management accounts.  Neither Perritt Capital Management or Windgate Management provides tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation.

Perritt Capital Management and Windgate Wealth are not responsible for, and expressly disclaims all liability for, reliance on any information contained in any third-party sites.  No guarantee that information provided in these sites is correct, complete, and up-to-date.

Information here is obtained from what are considered reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed.

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

First published February 2020.

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